Recently, the international financial market, especially the foreign exchange and stock markets in the United States and Japan, has experienced severe fluctuations. After the panic on August 5th, known as "Black Monday," there has been a gradual recovery. The underlying reasons can be primarily attributed to two intertwined factors that have created an "amplification effect" under the backdrop of the continuous strengthening of expectations for interest rate cuts by the Federal Reserve: First, amidst the complex and contradictory economic data in the United States, the July non-farm employment data fell short of expectations, triggering market sensitivity and highlighting the fragility of the U.S. economic recovery. Second, following an over-adjusted depreciation of the yen, Japan implemented a contractionary monetary policy, leading to a multiplied reversal effect of yen carry trades. The conflicting policy signals from the monetary policies of major developed countries have led to a sharp increase in market risk aversion and overly sensitive trading operations.
Faced with the complex and turbulent global financial environment, the market inevitably raises a series of questions and concerns. This article aims to address these from five aspects.
Question 1: Is the current international financial market turmoil likely to evolve into a global financial crisis?
While the financial market turmoil in countries like the U.S. and Japan cannot be said to have occurred without any signs, its sudden outbreak inevitably recalls the subprime crisis of 2007-2008.
During the subprime crisis, financial institutions such as New Century Financial, Bear Stearns, and Lehman Brothers successively fell into liquidity crises, causing global contagion and spread, leading to large-scale chaos and disorder in the financial market. However, it should be noted that one of the important reasons for the outbreak of the subprime crisis was the imperfect financial regulatory systems in the U.S. and Europe at the time, and the government's rescue was not timely or strong enough. Today, this unfavorable situation has improved significantly. Firstly, the global regulatory system has been significantly strengthened. After the subprime crisis, under the impetus of international financial bodies such as the Financial Stability Forum and the Basel Committee on Banking Supervision, governments around the world have strengthened capital regulation and macroprudential regulation, while enhancing international financial regulatory cooperation. The U.S. also passed the Dodd-Frank Act in July 2010, comprehensively advancing financial regulatory reforms from the dimensions of strengthening macroprudential regulation, raising regulatory standards, establishing self-rescue mechanisms, strengthening shadow banking regulation, reforming the securities market, and strengthening consumer protection, significantly enhancing the stability of the financial market. Secondly, the risk prevention and management awareness of regulatory and monetary authorities in various countries has continued to improve. In 2023, the U.S. experienced a Silicon Valley Bank bankruptcy incident, which spread to some small and medium-sized banks in the U.S. and even Credit Suisse in Europe, but due to the decisive handling by the U.S. government and regulatory authorities,采取了超强的干预举措，并与欧洲监管部门紧密协同，风波很快平息，类似于次贷危机的严重金融危机并未出现。即便未来爆发新的传染性金融风险，各国监管和货币当局也可以灵活运用降息、创设结构性货币政策工具、通过贴现窗口向有流动性压力的金融机构提供流动性支持等手段快速实现金融机构和市场的稳定。第三，美欧货币政策的调节空间较大。由于前期抑制通胀的需要，美联储、欧洲央行等普遍持续加息，目前基准利率大多都在5%以上，这为相关央行接下来实行较为宽松的货币政策提供了充足政策空间。最后，目前主要发达国家金融业总体平稳。如美联储最新发布的半年度《金融稳定报告》显示，美国银行体系保持稳健和弹性，风险资本比率远高于监管要求；企业偿债能力依然强劲；家庭债务相对于GDP处于适度水平，且集中在优质借款人身上。欧洲央行最新金融稳定报告也强调，尽管当前面临诸多挑战，但欧元区金融稳定依然可以实现。
Advertisement
There is reason to believe that although the recent global financial market turmoil may continue for some time, under the strict vigilance and rapid response of governments and regulatory authorities, the probability of it ultimately evolving into another severe global financial crisis is not high. Instead, it is more likely that the amplitude of fluctuations will gradually decrease.
Question 2: Will the U.S. experience a severe recession? Is it possible for the Federal Reserve to cut interest rates ahead of schedule?
The "2024 Second Half Macroeconomic and Financial Report" by the Chief Industry Research Institute points out that since 2024, the global economy has shown a significant characteristic of "three unsynchronized and one weakening." Among them, a prominent feature of the unsynchronized global economic recovery is the "apparent strength and hidden weakness" of the U.S. economy, meaning that the foundation of economic recovery is not solid, and the momentum of recovery is likely weakening. This year, some U.S. employment data have been eye-catching, such as the non-farm employment population increasing by 272,000 in May, far exceeding the market expectation of 185,000; in June, the number of new non-farm jobs reached 206,000, exceeding the market expectation of 190,000. However, on the other hand, macroeconomic data such as manufacturing, consumption, and real estate have all significantly fallen short of expectations, such as the U.S. ISM manufacturing PMI in June being 48.5, not only a significant decline from 50.3 in March but also lower than 48.7% in May; the U.S. retail sales monthly rate in June fell from 0.3% to 0%, reflecting the weakness of consumption; the U.S. real estate market continued to weaken in June, with the sales of new and existing homes continuing to decline, among which new home sales were 51,000 units, the lowest since November 2023, and existing home sales have been declining year-on-year for 34 consecutive months. It is under these circumstances that the number of new non-farm jobs in the U.S. in July was only 114,000, far below the market expectation of 175,000, and the unemployment rate rose to 4.3%, not only shaking the market's confidence in the steady recovery of the U.S. economy but also triggering the "Sam Rule," raising concerns about the U.S. economy falling into a recession.
But is the U.S. economy really on the verge of a recession? Firstly, looking at the inventory cycle, the U.S. is currently similar to China, transitioning from passive destocking to active restocking, and may need to consolidate for a relatively long period at the bottom. Although the U.S. is facing issues such as slowing consumption, weak manufacturing activity, and deteriorating employment conditions, coupled with the negative impact of long-term high interest rates, there is no significant external shock or threat to the U.S., and the U.S. economy is not likely to face a severe recession or "hard landing" risk in the short to medium term. Official U.S. data shows that the U.S. real GDP growth rate in the first quarter was 1.4% at an annual rate, and the growth rate in the second quarter further rose to 2.8%.
Secondly, from the scientific nature of predicting a U.S. economic recession, although the "Sam Rule" has some effect in empirical prediction, judging whether the U.S. economy will fall into a recession based solely on the unemployment rate indicator is biased, after all, a single indicator is easily disturbed by various factors. Therefore, it is necessary to more comprehensively refer to other prediction models, such as the Atlanta Fed's GDPNow model predicting the U.S. third-quarter GDP growth rate at 2.5%; the Philadelphia Fed's SPF recession indicator also predicts that the U.S. GDP growth rates for 2024-2026 will be 2.5%, 1.9%, and 1.9%, respectively. Obviously, these forecast results are far from the usual definition of a recession (GDP negative growth for two consecutive quarters).Looking at the latest data, the US economy remains complex and full of contradictions, making it difficult to make a simple recession judgment. Considering that the service industry accounted for as much as 81.6% of the total US economy in 2023, judging the trend of the US economy must first look at the prosperity of the service industry. The US ISM service industry PMI for July, announced on August 5, was 51.4, higher than the market expected value of 51 and the previous value of 48.8, showing that the US service industry is still very resilient, returning to the expansion range after a brief contraction, with new orders, employment, backlog orders and other sub-item data all exceeding expectations. On the same day, the final value of the US July S&P Global Service Industry PMI was 55, slightly lower than the previous value of 56, but still in the expansion range.
Considering various factors such as US inflation, growth, employment, and interest rates, the new round of interest rate cuts by the Federal Reserve is likely to be preventive rather than remedial. Therefore, the Federal Reserve does not have an imminent need for an "emergency rate cut" at the moment, and it is highly likely to continue to insist on the first interest rate cut at the end of September. However, it cannot be ruled out that if the US experiences a significant internal or external shock in the future, the preventive interest rate cut may turn into a remedial interest rate cut.
Question 3: Under the expectation of the Federal Reserve's interest rate cut, will the US stock market experience a rapid outflow of funds and evolve into a bear market?
In the short term, after the panic of "Black Monday", the US stock market rebounded on Tuesday, with all three major stock indices closing higher, the Dow Jones Industrial Average rose by 0.76%, the S&P 500 index rose by 1.04%, and the Nasdaq rose by 1.03%. Technology stocks, bank stocks, and popular Chinese concept stocks all generally rose. In the medium term, the Federal Reserve's interest rate cut may not necessarily constitute a major bearish factor for the US stock market.
Firstly, looking at the Federal Reserve's interest rate cut cycle over the past 30 years, interest rate cuts do not necessarily lead to the US stock market moving towards a bear market. For example, during 2001-2003 and 2007-2008, the Federal Reserve's interest rate cuts were accompanied by a decline in the US stock market; while during the interest rate cut cycles of 1984-1986, 1989-1992, and 1995-1998, the US stock market actually saw a significant increase. It can be seen that the US stock market has risen and fallen after interest rate cuts, and there is no strong causal relationship between the two.
Secondly, under the background of the Federal Reserve's interest rate cuts, cross-border capital may indeed flow out of the US and some may flow back to emerging market countries, but this is mainly in terms of the US Treasury bond market and deposit market. As for the performance of the US stock market, it largely depends on the operating performance and profit prospects of listed companies. Theoretically speaking, interest rate cuts can help reduce the financing costs and financial burdens of US listed companies. Therefore, funds flowing out of the US Treasury bond market and deposit market may also flow into the US stock market to obtain relatively higher investment returns.
Finally, the Federal Reserve's interest rate cuts sometimes appear together with the decline of the US stock market because the purpose of the Federal Reserve's interest rate cuts may be to deal with the impact of a severe crisis, that is, the so-called remedial interest rate cuts. For example, the 2001 internet crisis and the 2007-2008 subprime crisis were both accompanied by the Federal Reserve's interest rate cut cycle. These crises are the reasons for the decline of the US stock market.
Question 4: How long will the impact of the reversal of the yen carry trade last?
An important trigger for the recent global financial market turmoil is that the Bank of Japan raised interest rates again at the end of July, leading to the appreciation of the yen, the reversal of the yen carry trade, and a large number of institutions and investors are eager to close their short yen positions, even selling Japanese stocks to get back yen.
The reversal of the yen carry trade is not new, it has occurred in 2007 and 2016. However, due to the Bank of Japan's long-term implementation of zero interest rate monetary policy in recent years, coupled with the yen exchange rate that has been falling for a long time, it once broke through the 160 mark, setting the lowest record since 1986. Therefore, the scale of the yen carry trade may far exceed the past, and speculative short positions in yen futures are believed to have reached the highest level in the past 20 years.In summary, against the backdrop of the new round of the Federal Reserve's interest rate cut cycle, the Chinese yuan may experience a recovery in appreciation, but the extent is relatively limited, and it is unlikely to see a significant one-sided appreciation.